Monday, October 17, 2011

Restrictive Covenants

Restrictive Covenants

By Kenneth Vercammen, Esq. Most businesses spend thousands of dollars developing client lists, training staff and promoting and advertising their businesses. After investing substantial time and money in good will, an owner needs to protect the business from employees attempting to leave and take away accounts. Without a non-compete clause and a restrictive covenant, an employee can open up a competing business on the same street! An employer does not want to pay an employee to build relationships and develop a business, only for that employee to leave, take the fruits of the employers investment, and compete directly against the employer. The NJ Supreme Court granted greater protection to employers and businesses in Lamorte Burns & Co., Inc. v. Walters 167 N.J. 285 (2001)

The Court in Lamorte held: By secretly collecting confidential and proprietary client information while employed by Lamorte Burns & Co., Inc. and using the data to solicit and take away Lamortes clients immediately after resigning, Michael Walters and Nancy Nixon breached their duty of loyalty, tortiously interfered with Lamortes economic advantage, misappropriated confidential and proprietary information, and competed unfairly.

The Court in Lamorte determined that: The client information gathered from Lamortes files by Walters and Nixon was not generally available to the public, would not have been known to defendants but for their employment by Lamorte, went beyond mere client names, and gave defendants an advantage in soliciting clients after they resigned. Walters and Nixon knew Lamorte had an interest in protecting the information. The client information was confidential and proprietary.

The Supreme Court in Lamorte also determined that: An employee may prepare to start a competing business while employed by the entity he will compete with, but may not breach the undivided duty of loyalty owed the employer while still employed by soliciting the employers customers or engaging in other acts of secret competition. Walters and Nixon breached the duty of loyalty by collecting protected information while employed by Lamorte for the sole purpose of gaining an advantage over Lamorte as soon as they resigned.

The Supreme Court in Lamorte held that: Walters and Nixon acted with malice and in a manner contrary to the notion of free and fair competition by using the secretly gathered confidential client data to effect a weekend coup, knowing that the delay in Lamortes discovery of their resignation and solicitation would work to their economic advantage Restrictive covenants are very useful for businesses to prevent an employee from taking your clients and your business.

Recently, the NJ Supreme Court ruled an non-compete covenant as enforceable and not against public policy. In Maw v. Advanced Clinical Communications, Inc (ACCI) 179 N.J. 439, 846 A.2d 1222. (2004). In this case, Karol Maw began working for Advanced Clinical Communications, Inc. (ACCI) as a graphic designer on November 1, 1997. ACCI provides marketing and educational services for the pharmaceutical and healthcare industries. Maw had been hired to design written materials used by ACCI in its marketing and educational programs. Maw was promoted to Senior Graphic Designer in January 2001. Thereafter, pursuant to a new company policy, ACCI required all of its employees at or above the level of ³coordinator² to sign a non-compete agreement as a condition of continuing employment. The agreement precluded, among other things, Maw from becoming employed by any competitor or customer of ACCI for a period of two years following the termination of her employment. Maw was informed that she could seek legal advice concerning the employment agreement. Maw consulted her father, an attorney, who suggested changes. Maw presented those revisions to ACCI¹s Human Resource Department but was told that no changes could be made. Maw did not sign the non-compete agreement, prompting her termination by ACCI in March 2001 for failing to comply with company policy. The court in Maw held her conscientious employee CEPA claim must fail because our State¹s public policy respecting noncompete agreements is not set forth in a ³clear mandate,² and does not ³concern[] the public health, safety or welfare or protection of the environment.² N.J.S.A. 34:19-3c(3). Over a generation ago, our Court sketched the broad parameters for determining whether a noncompete agreement was unenforceable. Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971); Solari Indus. Inc. v. Malady, 55 N.J. 571 (1970). In Solari, the Supreme Court canvassed, the historical treatment of noncompete agreements, and acknowledged the previously held negative view of such agreements. 55 N.J. at 575-84. The Court cited academic writings on the topic that elaborated in greater detail on the relation of such agreements to Anglo-American commercial practices. See, e.g., Solari, supra, 55 N.J. at 574-77 (citing Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625 (1960)). The court in Maw further held: But Solari was a turning point, for the Court held then ³that the time is well due for the abandonment of New Jersey¹s void per se rule in favor of the rule which permits the total or partial enforcement of noncompetitive agreements to the extent reasonable under the circumstances.² 55 N.J. at 585. In Whitmyer, supra, The Court expanded on Solari, establishing what is now known as the Solari/Whitmyer test for determining whether a noncompete agreement is unreasonable and therefore unenforceable. Under the Solari/Whitmyer test, a noncompete agreement is enforceable ³if it Osimply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.¹² Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988) (quoting Whitmyer, supra, 58 N.J. at 32-33). The first two prongs of the test require a balancing of the employer¹s interests in protecting proprietary and confidential information and the asserted hardship on the employee. Ingersoll-Rand, supra, 110 N.J. at 634-35. The third requires the reviewing court to analyze the public¹s broad concern in fostering competition, creativity, and ingenuity. Id. at 639. Solari/Whitmyer has now become an accepted part of the common law, not only in New Jersey but also in other jurisdictions around the country. Id. at 630-34. The court in Maw further held: Although our dissenting colleagues may contend that do-not-compete provisions are, or should be, per se illegal, in point of fact, they are not illegal per se. It is not accurate to describe our current caselaw, which allows enforcement of reasonable non-compete agreements, as a ³clear mandate² that disfavors such agreements. The Solari/Whitmyer test is a multi-part, fact-intensive inquiry. Not only must multiple interests of differing parties and entities be identified, but also, those interests must be gauged for reasonableness and legitimacy. The application of that test here, and as a general matter, simply does not evoke the type of a ³clear mandate of public policy² that was contemplated by N.J.S.A. 34:19-3c(3). The court in Maw further held: The Court are informed by the amici that non-compete agreements are a common part of commercial employment. The Court do not accept as a premise that employers, in large numbers, are engaging in a practice that is ³indisputably dangerous to the public health, safety or welfare.² Dzwonar, supra, 177 N.J. at 464. It is more appropriate to characterize the business community as having adapted to the Solari/Whitmyer approach that recognizes that noncompete agreements can serve a useful purpose so long as the agreement is not unreasonable. The court in Maw concluded that plaintiff¹s private dispute over the terms of the do-not-compete provision in her employment agreement does not implicate violation of a clear mandate of public policy as contemplated by Section 3c(3) of CEPA. As previously noted, plaintiff did have options available to her. If she could not negotiate terms that were to her liking, she was free to dispute the reasonableness of those terms if and when her employer attempted to enforce the agreement. The burden then would be on the employer to hire counsel and initiate enforcement litigation, Solari, supra, 55 N.J. at 574, and nothing would preclude an employee-defendant in such an action from asserting any and all affirmative defenses and counterclaims. Ingersoll- Rand, supra, 110 N.J. at 621-22